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With the recent market turmoil and uncertainty, equity indexed annuities may be a good option for someone nervous about having their retirement savings being exposed to the volatility of the stock market. Equity indexed annuities were introduced in 1995 and have become increasingly popular ever since. Index annuities are underwritten by insurance companies that provide a minimum guaranteed return with excess interest crediting based on the performance of an outside index, such as the S&P 500, Russell 2000, etc.

So how do you know if you are suitable for such a product? That depends on several factors – most importantly, the investor’s time frame and purpose of the investment. If you are a short term investor looking for maximum return, then an equity indexed annuity is not for you. Annuities are meant for long-term retirement savings. If you are looking for double-digit returns on your investment, you are not going to find them in an index annuity. If you feel you need to adjust your portfolio on a regular basis, an equity indexed annuity may not be for you. So who may be suitable for such an investment? Long term savers who have a low tolerance to risk when it comes to loss of principle and are more comfortable with a steady paced return on investment are great candidates for an index annuity. If you are seeking potential higher rates of return than a savings account or CD and protection of principle, an equity indexed annuity may provide that. Equity indexed annuities also have the advantage of tax deferral of the earnings which make it a great retirement savings vehicle. Keep in mind, an annuity may only be one piece of your overall retirement plan portfolio.

Some Contract Features:

Guaranteed Minimum Rates of Return

Regardless of market performance, an equity indexed annuity guarantees a minimum rate of return – typically 3% credited to some portion of the account value during the contract’s term.

The Stock Index

Equity-indexed annuities credit the return under certain circumstances based on the change in the level of a stock price index such as the S&P 500 or other indices. Although, unlike an index mutual fund, dividends and capital gains are not included in the annuity interest calculation.

Participation Rate

Participation Rate describes the extent to which the contract holder shares in an index increase. The participation rate (a percentage) is multiplied by the index change (also a percentage) to arrive at the interest rate to be credited to the policy. A 50% participation rate means the contract holder shares in, or ‘participates in’, half the index change for the period.

Caps

A Cap is a ceiling or upward limit on the interest that may be credited to the annuity. A cap usually represents the maximum interest that can be credited to the annuity in any one period.

An investor must be aware that equity indexed annuities have fees that will get you in the back-end if you access your money prior to the maturity of the contract. These fees, known as surrender fees, can be extremely expensive in some annuities. The surrender charges usually decline over a period of years, but not always. As stated earlier, equity indexed annuities are for long term investors so it is important to be able to commit your funds for the life of the contract.

There are many different factors when considering this type of investment. Annuities vary from contract to contract and insurance company to insurance company, which can become very confusing very quickly. Each contract has its own unique fees, surrender charges, participation rate, cap, annual reset, among other things. Equity indexed annuities have gotten a bad rap over the past few years. That is mostly because of inexperienced, unknowledgeable or unqualified sale agents marketing to clients who may be unsuitable for the product. It is highly recommended that you speak with a knowledgeable investment advisor who has experience working with equity indexed annuities and the ability to accurately assess your financial suitability before committing your money.